Big Trouble for the US Dollar?

Hyperboles are nothing new to gold bugs. One of my favourites was a description
of the coming Islamic Gold Dinar describing it as a neutron bomb against the
US Dollar, worse than anything than Osama Bin Laden could possibly do. While
that may be an overstatement there is a potential for the Islamic Dinar to
cause severe dislocations.

The reasons behind the Islamic Gold Dinar are simple. Gold cannot be inflated,
nor can it be devalued, nor is it dependent on anybody's promise to pay. Gold
is no one else's liability. Paper assets - currencies, stocks, bonds, and bank
deposits are merely promises to pay something that is borrowed. Currencies
collapse, stocks can go to zero, bonds default and banks close their doors.
All of these are constants in today's world of paper assets somewhere in the
world. And the Western Nations especially the US are built on a mountain of
paper assets where over the past few years it has taken almost $7 in new debt
to purchase $1 of GDP even as the paper assets in the stock market are inflating
once again and the US$ is falling.

The Islamic Gold Dinar has been in the works now for a number of years. It
is used in a number of Islamic countries already but thus far its use remains
small. It could soon be gaining wider usage as it is being promoted widely
for Muslims to exchange their paper currency for the Islamic Gold Dinar. There
are a number of Dubai-based mints and mints in other Islamic countries producing
gold dinars as well as silver dinars. Malaysia adopted the currency in mid-2003
and a number of other Islamic countries are slated to join this year. It is
the intention of the Islamic countries to use the Islamic Gold Dinar to replace
the US Dollar for commercial transactions between their countries.

There has even been an electronic dinar website started at www.e-dinar.com.
The member countries of the Islamic Development Bank (some 51 countries) are
committed to moving to the use of the Islamic Gold Dinar as a medium of exchange.
The Islamic Dinar is equivalent in value to the IMF's Special Drawing Rights
(SDR's) which is the unit currency of IMF and itself is backed by gold. There
is also an agency in Dubai set up to handle accounts and payments between accounts.
This is meant to allow the use to spread further throughout the Muslim world.

While there has been considerable press about the Islamic Dinar in Muslim
countries it has caught little attention in the Western nations. That is probably
because thus far it has not had much impact. But as gold continues to go higher
and the US Dollar falls further that may change. We are reminded that while
Gold and Silver are commodities they are also monetary assets.

While the potential for the growing use of the Islamic Gold Dinar will add
to the monetary demand for gold (and silver) there is another potential monetary
demand looming. That is China where the Chinese government in 2002 revived
the long dormant (for 50 years) Shanghai Gold Exchange and also authorized
the Bank of China and the commercial banks to trade in gold. Under the previous
communist regime there was a long period of condemnation of gold.

In 2004 the people of China will be allowed to buy gold for the first time
as an investment since 1949. This could be significant as for the past two
years the Chinese government has been laying the groundwork. There is estimated
to be upwards of US$1.3 trillion in savings currently in the Chinese banking
system. These savings have helped fuel China's incredible growth but now being
free to buy gold for the first time in years if even a small amount say 1%
it would put pressure on the gold market to fill demands.

As well the Chinese have been openly concerned about maintaining the value
of the Yuan given a long history of currency collapses. The Bank of China has
been a significant purchaser of gold during the period when the announcements
always seemed to be favouring that central banks were selling gold. As well
the Bank of China has been a significant purchaser of US securities in order
to help maintain the value of the Yuan against the US$. As a result China's
foreign reserves have been growing and they want to maintain at least minimal
levels of gold (2.4%) as a portion of their reserves. The Chinese are also
very interested in the Islamic Gold Dinar and the possibility of backing the
Yuan with gold. This could set the stage for Asian countries to be gold based
in an era that the Western Nations maintain a fiat currency system.

We believe that the gold movements in the Islamic countries and China are
largely being ignored in the Western nations because it has not as yet become
significant. But the day of reckoning may be looming closer as the potential
for a huge surge in demand from 1.3 billion Chinese and another 1.5 billion
Muslims begins to take hold. India is already the world's largest consumer
of Gold and if we add the potential in the Islamic countries plus China there
would be two further demands for gold (and silver). One demand would be in
the traditional commodity sense for jewellery and the other for monetary purposes
in an area of the world that holds over half the world's population. None of
this would be positive for the US$ currently the world's reserve currency.

The current weakness in gold (silver) is being driven by the desire of the
Europeans and the Japanese to slow the advance of their currencies against
the US$. This is temporary as each of them are in a race to the bottom in currency
devaluation. But this correction is one that could last into the second quarter
2004. We have targets of at least $400 on Gold and possibly as low as $390
so investors may wish to be patient before jumping back into the gold market.

Investors are reminded that still the best way to purchase bullion is by owning
either of Central Fund of Canada (CEF.A-TSX) (www.centralfund.com,
905-648-7878) a closed end trust, and the Millennium BullionFund (www.bullioonfund.com,
416-777-6691) (Note: I am a director of the MBF) an open ended mutual fund
trust. Central Fund can trade at a substantial discount or premium to NAV depending
upon demand.

The current pause in gold and silver prices as well as other commodity prices
is also an opportunity to mine for junior exploration plays. These small companies
exploring for minerals in the outer regions of the world are important in the
process. The world is facing shortages of many commodities as demand world
wide increases particularly from Asia. It takes upwards of 12 years to go from
exploration to a working mine so these juniors are at the forefront.

We have mentioned some junior mining plays in other articles. We believe these
companies are at the cusp of a significant boom in 2004. There are many of
them out there almost too numerous to mention. Like the major producers they
are currently correcting their first good move up seen in late 2003. So this
is a time to accumulate while the prices are still low. Three more that we
are following are: MacMillan Gold Corp. (MMG-TSXV) (www.macmillangold.com,
416-867-1101) with properties in Mexico in gold and silver; Spider Resources
Inc. (SPQ-TSXV) (www.spiderresources.com,
416-815-8666) a company with projects in Ontario, Brazil and the Northwest
Territories involved in base metals and diamonds; and, Canadian Golden Dragon
Resources (CGG-TSXV) (www.goldendragon.com,
416-504-0077) with exploration in Ontario and Quebec.

David Chapman is a director of Bullion Management Services
the manager of the Millennium BullionFund www.bmsinc.ca

Note: The opinions, estimates and projections stated
are those of David Chapman as of the date hereof and are subject to change
without notice. David Chapman, as a registered representative of Union Securities
Ltd. makes every effort to ensure that the contents have been compiled or derived
from sources believed reliable and contain information and opinions, which
are accurate and complete.

The information in this report is drawn from sources believed
to be reliable, but the accuracy or completeness of the information is not
guaranteed, nor in providing it does Union Securities Ltd. assume any responsibility
or liability. Estimates and projections contained herein are Union's own or
obtained from our consultants. This report is not to be construed as an offer
to sell or the solicitation of an offer to buy any securities and is intended
for distribution only in those jurisdictions where Union Securities Ltd. is
registered as an advisor or a dealer in securities. This research material
is approved by Union Securities (International) Ltd. which is authorized and
regulated by the Financial Services Authority for the conduct of investment
business in the U.K. The investments or investment services, which are the
subject of this research material are not available for private customers as
defined by the Financial Services Authority. Union Securities Ltd. is a controlling
shareholder of Union Securities (International) Ltd. and the latter acts as
an introducing broker to the former. This report is not intended for, nor should
it be distributed to, any persons residing in the USA. The inventories of Union
Securities Ltd., Union Securities (International) Ltd. their affiliated companies
and the holdings of their respective directors and officers and companies with
which they are associated have, or may have, a position or holding in, or may
affect transactions in the investments concerned, or related investments. Union
Securities Ltd. is a member of the Canadian Investment Protection Fund and
the Investment Dealers Association of Canada. Union Securities (International)
Ltd. is authorized and regulated by the Financial Services Authority of the
U.K.